China credit market tensions stoke wider concerns

BEIJING (AP) — For the second time in six months, a shortage of cash in one corner of China's banking industry has stirred anxiety in financial markets.

Though tensions eased somewhat Tuesday after China's central bank provided billions of dollars in short-term funding to banks, financial market analysts are keeping a close watch on developments in China's credit markets. Because China is now the world's second-largest economy, tensions there could have repercussions worldwide.

"If it looks vulnerable as we start the New Year then the rest of the world should be getting nervous," said Kathleen Brooks, a research director at Forex.com in London. "If China catches a cold this winter, we expect the rest of the financial system to get a dose of the shivers."

The interest rate charged on 7-day loans from one bank to another spiked to nearly 9 percent on Monday, well above the usual 2-3 percent. That came even after the Chinese central bank injected 300 billion yuan ($50 billion) of extra credit into the interbank market last week.

On Tuesday, the People's Bank of China injected a further 29 billion yuan ($4.8 billion) into Chinese banks. This time, the injection worked and the rate banks pay each other a one-week loan eased to 6.2 percent, according to the National Interbank Funding Center.

Interbank lending rates don't apply directly to borrowing by companies or households. But they could have repercussions if the cash shortage forces banks to restrain commercial lending.

A look at China's latest credit crunch:

WHAT HAPPENED?

Chinese banks that turned to money markets in recent weeks for extra cash found less than usual. That set off a bidding war that pushed up the rates they had to pay for loans. The reasons for the crunch are unclear. Some analysts say it might stem from banks' end-of-year need for money to balance their books. Many would be borrowing and few lending, leading to a cash shortage.

THE IMPACT

Banks might be forced to reduce lending temporarily if they cannot raise enough cash to satisfy regulatory minimum requirements, though that appears unlikely. That might affect credit to companies and households. The central bank already is taking action to prevent that.

One short-term impact: The rate spike pushed up the cost of financing stock trades. That caused China's stock markets to tumble last week.

WHAT HAPPENED EARLIER?

In June, money markets suffered an even bigger rate spike after the central bank tried to rein in a credit boom. Interest paid by banks for an overnight loan soared to a record 13.4 percent. Analysts said the central bank was at least partly to blame because it failed to make clear how tough its stance would be.

THE WIDER IMPACT

The spikes in June provided another jolt to investors, who were already fretting over waning growth in China. Growth tumbled to a two-decade low of 7.5 percent in the three months ending in June before rebounding to 7.8 percent the following quarter. Analysts say that recovery is likely to fade this quarter or early in 2014.

CHINA'S BANKING INDUSTRY

Some analysts consider China's state-owned banking industry to be the world's strongest financially as it avoided the mortgage-related turmoil that battered Western institutions. The four biggest commercial lenders have total assets in excess of $10 trillion.

THE LINK TO THE FED

China's financial markets are kept sealed off from global capital flows. So the U.S. Federal Reserve's decision last week to begin reducing its monetary stimulus would have no direct impact on Chinese markets.